Many small business owners need help to differentiate their retirement plans from others. However, 401(k)s are highly customizable with various contribution “features” like safe harbor matches, automatic enrollment, Roth contributions, and profit-sharing allocation formulas.
A 401(k) is an essential tool for attracting and retaining employees. Read on to learn how to select a provider to serve your needs.
Tax-Deferred Savings
Offering retirement benefits is a smart way to attract and retain employees. 401k plans allow employees to save money on a tax-deferred basis, reducing the impact of current income taxes on their investments and future retirement distributions.
Besides allowing workers to invest pretax earnings, many companies provide matching contributions and profit sharing to help them reach retirement goals. Depending on the type of plan you select, employees can also make elective salary deferrals to increase their savings even further.
Small businesses looking to save on plan setup and recordkeeping fees should consider a SIMPLE IRA, which is simple to manage, exempt from nondiscrimination testing, and allows participants to be fully vested immediately. However, it may be limited in how much can be contributed to employee accounts.
Suppose you have a high number of highly compensated employees (HCEs). In that case, consider a safe harbor 401(k) plan, which automatically passes nondiscrimination tests when mandatory contribution and participant disclosure requirements are met. Additionally, some providers offer low-cost funds, which can reduce your business’s expense ratio and improve your team’s investment potential. Whether you choose a traditional or safe harbor 401(k) plan, find a reputable firm that can handle both the recordkeeping and third-party administration side of your business. This will give you peace of mind, knowing you have a trusted partner for the long haul.
Flexibility
Offering a 401(k) plans for small businesses to employees provides a unique opportunity for small businesses to stand out from their competition. This benefit may attract applicants who would otherwise have turned down the job and increase employee retention by reducing financial anxiety, making your workforce happier and more productive.
The 401(k) plans available to small businesses are highly customizable. What might seem like different plan “types” (Safe Harbor, Roth, profit sharing) are foreign contribution “features,” which can be combined in many ways to meet the goals of your business. This process of matching your company’s goals with the available 401(k) features is called plan design.
For example, a company with fewer than 100 employees can establish a SIMPLE IRA, allowing each employee to contribute money into their own individual IRA account. There are minimal administrative fees associated with this type of retirement plan, and it is easy to set up and maintain. It also passes annual IRS nondiscrimination testing.
For companies with more than 100 employees, a traditional 401(k) option allows participants to make pre-tax salary deferrals and receive employer contributions on both a qualified and nonqualified basis. The benefits of this type of plan include greater flexibility for matching and matching-plus-profits contributions, as well as the ability to use a discretionary contribution feature.
Tax-Free Earnings
401(k) plans are not only tax-deductible for small businesses but also allow employees to earn investment returns on pretax dollars. The benefit for business owners is that these tax breaks can add up quickly and help reduce company expenses come year-end.
Many small businesses offer an employer match, which can increase employee salary deferrals by up to 4% of their paycheck. The good news is that matching contributions, as well as profit-sharing options, are also tax-deductible for small businesses as ordinary business expenses.
If you are looking for a 401(k) provider for your small business, make sure to find one that offers a comprehensive suite of services designed to meet the unique needs of small businesses. The ideal provider will handle recordkeeping, compliance testing, day-to-day plan administration, and more. This can help you avoid the hassle and cost of managing multiple systems and vendors.
Some 401(k) providers are now offering fiduciary protections in their service offerings to small businesses. This can help you reduce the risk of costly lawsuits that could threaten your business and your retirement plan.
Investment Options
Offering a 401k plan is a good way for small business owners to incentivize employees to save. Employees can choose how much to contribute, and the business can also contribute.
Regarding investment options, the 401(k) allows employees to invest in various investments. For example, participants can choose from a selection of mutual funds, or they can invest in individual stocks and bonds. There are even several target-date funds that are designed to help employees balance risk and return as they approach retirement age.
Some popular 401(k) providers include Fidelity Investments, Vanguard, and Charles Schwab. All of these companies offer a range of different services, including recordkeeping and third-party administration. They also offer various investment options, from low-cost index funds to ETFs.
Many companies also provide online access to the 401(k) plans. This allows employees to check their accounts at any time, which can be helpful if they have questions or want to keep track of their progress.
For small business owners who do not have enough employees to benefit from a 401(k) plan, they can consider a solo 401(k), which is similar to the traditional 401(k). This is an excellent option for sole proprietors and other independent contractors looking to save money for their future.